Freddie/Fannie overhaul measure passes Senate

** FILE ** In this Feb. 25, 2008 photo, Sen. Chris Dodd, D-Conn., smiles as he is introduced to members of the Middlesex County Chamber of Commerce in Cromwell, Conn. If the veteran Senator's trademark jaunty smile seems a bit forced these days, it's no surprise. The five-term Democrat's home-state popularity has slipped in the wake of his failed presidential bid and allegations he got cut-rate mortgages from a leading offender in the subprime mortgage meltdown. (AP Photo/Jessica Hill, file) less

** FILE ** In this Feb. 25, 2008 photo, Sen. Chris Dodd, D-Conn., smiles as he is introduced to members of the Middlesex County Chamber of Commerce in Cromwell, Conn. If the veteran Senator's trademark jaunty ... more

Photo: Jessica Hill, ASSOCIATED PRESS

Photo: Jessica Hill, ASSOCIATED PRESS

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** FILE ** In this Feb. 25, 2008 photo, Sen. Chris Dodd, D-Conn., smiles as he is introduced to members of the Middlesex County Chamber of Commerce in Cromwell, Conn. If the veteran Senator's trademark jaunty smile seems a bit forced these days, it's no surprise. The five-term Democrat's home-state popularity has slipped in the wake of his failed presidential bid and allegations he got cut-rate mortgages from a leading offender in the subprime mortgage meltdown. (AP Photo/Jessica Hill, file) less

** FILE ** In this Feb. 25, 2008 photo, Sen. Chris Dodd, D-Conn., smiles as he is introduced to members of the Middlesex County Chamber of Commerce in Cromwell, Conn. If the veteran Senator's trademark jaunty ... more

Photo: Jessica Hill, ASSOCIATED PRESS

Freddie/Fannie overhaul measure passes Senate

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Congress took a step closer to addressing the nation's housing crisis Friday as the Senate passed a long-delayed bill to revamp the oversight of mortgage giants Freddie Mac and Fannie Mae and to help hundreds of thousands of people to avoid foreclosure by renegotiating their loans.

The bill still faces hurdles: It now goes back to the House, where lawmakers are seeking changes, including an attempt by Speaker Nancy Pelosi to raise the conforming loan limits - which govern the size of loans Freddie and Fannie can buy - to help borrowers in expensive housing markets like the Bay Area. The Senate bill set the figure at $625,000; Pelosi would prefer $730,000.

The White House has threatened a veto over several provisions. But all sides agree a deal is likely before the August break because no one wants to leave for vacation without approving some legislation to confront the worst housing downturn since the Great Depression.

"Everybody wants to get something done," said Erick Gustafson, senior vice president of legislative and political affairs at the Mortgage Bankers Association. "The differences between the chambers and between the Democrats and Republicans are quite narrow, as narrow as they've ever been with this bill."

The pressure to act grew this week as the financial markets were roiled by fears that Freddie Mac and Fannie Mae, the two government-chartered firms that provide more than half of all U.S. mortgages, might collapse and trigger a federal bailout. President Bush, Treasury Secretary Henry Paulson and top lawmakers made statements Friday to the effect that no government takeover is imminent. But investors did not appear soothed, and shares of the two firms fell to 17-year lows.

Most loans 30-year, fixed

Senate Banking Committee Chairman Chris Dodd, D-Conn., the lead sponsor of the bill, held a news conference Friday to say that he had spoken to the CEOs of both Fannie and Freddie, as well as to Federal Reserve Chairman Ben Bernanke, who assured him that the two loan giants have enough capital and are not at risk of default. He said the two firms have portfolios mostly composed of 30-year, fixed-rate loans, so they do not face the same problems as firms who relied more on risky subprime loans.

But Dodd said it was crucial to quickly pass the new bill, which would install a new regulator with greater oversight powers over Freddie and Fannie.

Bill too late for many

The bill has come too late for many homeowners. About 1.5 million families have lost their homes to foreclosure. But the legislation could benefit mortgage holders of some of the 252,000 properties that entered foreclosure last month, including almost 69,000 in California, according to a RealtyTrac Inc. Credit Suisse analysts estimate that 2.7 million subprime borrowers will enter foreclosure by 2012.

The bill creates a temporary program that allows homeowners who can't afford their rising monthly payments to refinance into more stable fixed-rate loans backed by the government. The measure would authorize the Federal Housing Administration to insure $300 billion in new loans, which could enable about 400,000 families stay in their homes.

Lawmakers insist it's not a bailout because lenders would have to accept a reduction in the value of the loan, and borrowers would have to share any equity or proceeds from the eventual sale of the home with the FHA to cover the program's costs. The program would be paid for with a new 4.2 basis point fee on all new loans and is temporary, ending Sept. 30, 2011.

The bill also contains some carrots to lure more buyers into the sluggish housing market, including tax credits for first-time home buyers and block grants to communities with high rates of foreclosure.

The White House opposes the block grants. The House did not include the provision in its bill and may strike it from the final bill.

Paul Leonard, director of the California office of the Center for Responsible Lending, said removing the block grants would hurt Bay Area communities such as East Oakland, Vallejo and Fairfield as well Stockton and Merced in the Central Valley, which have been particularly hard hit by foreclosures.

The Senate ultimately passed the bill 63-5 Friday evening - the vote count was low because many senators had already left town.

The measure includes a long-sought-after overhaul of the Federal Housing Administration, which helps insure loans to low-income borrowers, one of the top priorities of the White House. The bill also would create a long-term fund to build new affordable housing units.

House action next

The bill now moves to the House, where Pelosi and House Financial Services Committee Chairman Barney Frank, D-Mass., will have to decide several thorny issues, including whether to accept the Senate's $14.5 billion package of housing-related tax breaks (the House's package is closer to $11 billion). The Senate bill would take effect immediately, but Frank wants to delay the start date of some provisions to allow a smoother transition to the new rules.

Pelosi may have a tough time getting her wish of higher limits for conforming loans, which offer borrowers lower interest rates than if they have taken out "jumbo" loans. The economic stimulus package, signed into law by Bush in February, raised the loan limit to $729,750, but only until Dec. 31. The Senate bill would raise the limit to $625,000, but Dodd said it would be tough persuade senators from states with less costly housing markets to go much higher.

"We've reached about as far as we can reach," he said.

What's in the mortgage overhaul bill

Tax credit: First-time home buyers might be eligible for new tax credits of up to $8,000 per couple or $4,000 for an individual to stimulate a slow market.

Foreclosure help: The bill would allow borrowers to trade their exotic mortgages with rising monthly payments for fixed-rate, government-backed loans. But lenders would have to agree to take a loss on the loan, and borrowers would have to share equity with the government.

Saving neighborhoods: The bill offers $3.9 billion in grants to local communities hard hit by foreclosures to buy up empty properties to avoid blight. President Bush opposes this provision, and the House may not include it in its revised version.

Better oversight: The measure creates a new federal regulator, appointed by the president, with greater powers to oversee Fannie Mae and Freddie Mac, the two government-chartered mortgage giants.